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An overlooked concept in the world of non-profit organization financial management that does not appear to have hit its full stride yet is that of fiscal sponsorship. In a prolonged and challenging economic downturn, it may be a good time to look at it more closely. Prompted by the increase in the number of non-profit organizations seeking IRS tax exempt status (e.g., following the widespread devastation of Hurricanes Sandy and Katrina), fiscal sponsorship refers to the use of existing, established organizations to achieve similar or overlapping missions rather than forming new organizations. Essentially, a ‘fiscal sponsor’ is a non-profit, tax exempt entity that acts as a financial sponsor for a project, committee or another organization that may not yet have received its tax exempt status with the IRS. In recent years, fiscal sponsorship has become more widely known in areas of human services, environmental causes and artistic endeavors.

Perhaps ideal for start-up organizations or those that want to accomplish time-limited charitable projects, the fiscal sponsorship of a larger, established organization can provide often costly administrative “overhead” functions such as office space, payroll, employee benefits, fundraising, publicity, legal counsel and training assistance. Some project developers may simply want to test their ideas out in their fields of interest before taking on the task of applying for tax exempt status with the IRS. There are many kinds of sponsorships; however, chief among them is grant-seeking sponsorship largely because foundations and government agencies [always] fund organizations and disallow making grants to individuals. In effect, the fiscal sponsor organization may receive grants and donations and even engage in other fundraising activities on behalf of the project, manage those funds according to their intended uses as well as document the progress of the project. Choosing a fiscal sponsor largely depends on the nature or purpose of the project or committee and how consistent it may be with the mission of the larger organization. In addition, choosing a fiscal sponsor also needs to take into account the reputation of the larger organization in the community, its own financial health as well as its relationship with its funding sources. In other words, how attractive will the proposed sponsor organization be to potential funding sources for the project in subsequent grant requests? Aside from the local community, many national organizations have sprung up expressly for the purpose of providing fiscal sponsorships; for example, Tides in San Francisco, and many directories are available online. Moreover, the opportunities for a social cause or project to attract more attention and increased funding is somewhat greater in a fiscal sponsorship through the “cross promotional” benefits of an association with the larger, established organization. According to Gregory Colvin – a leading tax law expert in fiscal sponsorship – additional models of sponsorship include direct project sponsorship, independent contractor support, group exemption and technical assistance. For more detailed information about each of these models of fiscal sponsorship, please see Mr. Colvin’s book, Fiscal Sponsorship: Six Ways To Do It Right (Study Center Press, 2006).

Like many management decisions, entering into a fiscal sponsorship relationship is not a casual decision and does not come without some potential pitfalls for both the non-profit and the proposed project. A fiscal sponsorship arrangement needs to be formalized in a written contractual agreement or memorandum of understanding between both parties, typically specifying who will be responsible to do what and when. A memorandum of understanding – which, it is recommended, be reviewed by a tax attorney first – clearly addresses the terms and conditions of the project management, including the scope of the project, timeframes and deadlines, employment issues if necessary and the authority of the project, to name a few. Perhaps one of the biggest concerns for an established non-profit organization is that it will assume all of the legal liabilities, tax requirements and regulatory compliance of the project in a fiscal sponsorship agreement. Conversely, on the side of the project or committee seeking fiscal sponsorship, there may be a perceived lack of independence in the project when it is administratively managed by others. Additionally, that established non-profit organization is not going to give away their administrative time for nothing. The sponsoring organization can and most likely will charge administrative fees, which in itself need not be a bust for the project because the administration fees can be built directly and transparently into the budgets of grant requests.

Clearly, the choice of a social cause or project to seek fiscal sponsorship from a larger, established non-profit organization is a highly individualized and case-specific one. While some organizations and projects may view this kind of relationship as cumbersome or intrusive, others may thrive on it or choose to continue indefinitely in a sponsorship mode. Still other projects may receive enough valuable insight and guidance to launch their own non-profit organizations.

The proliferation of non-profit organizations across the United States has been well documented for years. According to the National Center for Charitable Statistics at the Urban Institute, in the ten-year period from 1999 to 2009, the U.S. saw a 31.5 percent increase in the number of registered 501(c)3 public charities, totaling more than 1.5 million nationwide (2010). That percentage increase excludes foreign and government organizations. In my state of Pennsylvania alone, Non-Profit Stats reports a whopping 72,725 registered charitable organizations (2013).

The numbers are even more significant today because many non-profit organizations in communities throughout the country are often trying to carve out their existence in fierce competition with one another for stagnant pools of local monies as well as they are facing reduced if not eliminated private and public funding in a poor economy.

My recent introduction to a very worthwhile start-up non-profit in the Lehigh Valley, PA community reminded me of the rigors of starting a new non-profit organization. The following are just a few highlights of the many, many “hoops” through which a fledgling non-profit is required to jump:

Determine the need and sustainability. Before hanging a sign on the door and printing business cards, determine the need for a non-profit serving the proposed mission or purpose in the community. Are there other organizations already established in the local community that serve the same purpose, goals, population or issues? If so, there may not be a strong commitment to a “duplicate” organization starting up. More important, determine the sustainability of the proposed non-profit among the community. Who will fund it? Is there enough interest and money in the community to support the organization on an ongoing basis? Research corporate and government funding opportunities that are good matches with the mission of the organization and visit with local, private foundations in order to introduce the idea of a start-up non-profit, gauge their interest, and get to know them.

Determine the type of tax exempt status needed. Perhaps the most widely known, the 501(c)3 non-profit is an IRS tax code that permits certain tax exemptions to charitable, educational, scientific, religious, etc. organizations. Other tax exempt codes have been established for civic leagues, child care and social welfare organizations; for example, that have varying disclosure requirements and contribution allowances. Currently, I count 34 different IRS tax exempt codes!

Establish by-laws. The by-laws of a non-profit define how the organization will function and conduct its business in the community and typically address issues like board governance, terms of service and lines of authority within the organization. Consultation with legal counsel – or at least review of the by-laws – is highly recommended at this stage of the process.

Select a board of directors. What does this particular non-profit need in terms of the community representation on the board of directors? In general, organizations usually need financial, legal and human resource experience. Additionally, people tend to gravitate to what they know best so it is typical; for example, to see organizations with an educational purpose with teachers and school district administrators on the board. Make it a goal to diversify the board of directors as much as possible. While there is obvious value in keeping similar people together, diversification in the board increases the richness of experience and expertise that a board of directors can provide to a non-profit.

Develop strategic and fundraising goals. The management and board of start-up non-profit organizations are strongly encouraged to engage in some level of strategic and fundraising planning. How will the organization be funded? Where do management and board members expect the organization to be financially and programmatically in a year? In three years? In five years? A strategic plan is even more important to start-up non-profits especially because in the absence of a proven, successful track record of results it is one of the key items to be shared with potential funders to demonstrate that the organization has been formed with forethought, expertise and a business plan.

Request tax exempt status from the IRS. This is really the “big kahuna” in forming a non-profit organization. An organization is not considered not-for-profit until the IRS deems it so with a “Letter of Determination” (see bullet above about types of tax exemption). Without it, an organization may not legitimately solicit funds as a non-profit and donors can not make tax deductible contributions.

File state articles of incorporation. Typically granted from a Department of State, incorporation refers to the absorption of state law under the specific protections of the U.S. Constitution. That is, the U.S. Constitution shall override all state constitutions and state laws. For organizations that plan to incorporate, this is a key step that may occur in conjunction with filing for tax exempt status with the IRS.

Establish record keeping and financial accounting systems. Establishing board approved, financial and internal management procedures and protocols early in the game; for example, financial statements and reports as well as board meeting minutes, is advisable. Who will be responsible for maintaining records and financial accounting?

Obtain liability insurance. Like any other business, non-profit organizations are susceptible to legal risks and start-up organizations are advised to obtain liability insurances. Again, consultation with an attorney familiar with non-profit organizations can be very valuable in selecting Directors’ and Officers’ liability insurance as well as general professional liability coverage.

The bulleted items above are only some of the issues that need to be addressed by a start-up non-profit organization. Depending on the organization, additional items that may need to be addressed at start-up include: personnel policies, unemployment compensation, withholding taxes for the IRS, filing for state sales tax exemption status, and registering with state Bureaus of Charitable Organizations.

References

The National Center for Charitable Statistics at The Urban Institute; Quick Facts About Nonprofits, Custom Report Builder (2013). Retrieved from: